PLC Paper No. CB(1) 80
(These minutes have been seen by the
Administration and cleared with the Chairman)
Ref : CB1/PL/FA/1

LegCo Panel on Financial Affairs

Minutes of Meeting
held on Monday, 2 June 1997,
at 8:30 a.m. in Conference Room A
of the Legislative Council Building

Members present :

    Dr Hon HUANG Chen-ya, MBE (Chairman)
    Hon Eric LI Ka-cheung, OBE, JP (Deputy Chairman)
    Hon Martin LEE chu-ming, QC, JP
    Hon David K P LI, OBE, LLD (Cantab), JP
    Hon CHIM Pui-chung
    Hon James TO Kun-sun
    Hon Andrew CHENG Kar-foo
    Hon Ambrose LAU Hon-chuen, JP
    Dr Hon LAW Cheung-kwok
    Hon NGAN Kam-chuen
    Hon SIN Chung-kai

Members absent :

    Hon Ronald ARCULLI, OBE, JP
    Dr Hon Philip WONG Yu-hong
    Hon Paul CHENG Ming-fun, JP
    Hon Mrs Elizabeth WONG, CBE, ISO, JP

Public officers attending :

Agenda item III

Mrs Rebecca LAI, JP
Deputy Secretary for Financial Services
Mr Gordon Jones, JP
Registrar of Companies

Agenda item IV

Mrs Rebecca LAI, JP
Deputy Secretary for Financial Services
Mr David J White
Executive Director
Securities and Futures Commission
Ms Barbara SHIU
Senior Director
Securities and Futures Commission
Mr Alec TSUI
Chief Executive
Stock Exchange of Hong Kong
Mr Lawrence FOK
Executive Director
Stock Exchange of Hong Kong

Agenda item V

Mrs Rebecca LAI, JP
Deputy Secretary for Financial Services
Mr David J White
Executive Director
Securities and Futures Commission
Mr Alec TSUI
Chief Executive
Stock Exchange of Hong Kong

Clerk in attendance:

I. Confirmation of minutes

[LegCo Paper No. CB(1) 1746/96-97]

The minutes of the meeting held on 7 April 1997 were confirmed.

II. Information papers issued since last meeting

2. No information paper had been issued since the last meeting.

III. Review of the Hong Kong Companies Ordinance

[LegCo Paper No. CB(1) 1667/96-97]

3. The Registrar of Companies (R of C) presented the salient points of the consultancy report on review of the Hong Kong Companies Ordinance (HKCO). In essence, Government had commissioned a consultant in early 1995 to conduct a comprehensive review of HKCO in order to simplify, rationalize and modernize Hong Kong’s company law. The reasons for conducting the review were as follows:

  1. the growth and complexity of company law needed to be radically examined;

  2. continuing piecemeal amendments to one part of the law might have unsuspected implications for other parts of the law;

  3. United Kingdom company law, which had provided the basis for Hong Kong company law, was becoming increasingly influenced by European Community directives and, as such, was now not necessarily the best model for Hong Kong;

  4. the regulatory framework needed to be reviewed to take account of the growth in the numbers of private and overseas-incorporated companies in Hong Kong; and

  5. the provisions of Hong Kong’s company law should be brought in line with those accepted internationally.

4. R of C also advised that issues raised in the review process were grouped into the following modules:

  1. identification of core company law;

  2. corporate formalities;

  3. shareholders rights, remedies and communications;

  4. directors duties and corporate governance issues; and

  5. foreign/international business corporations.

Relevant parties and Government departments had been invited to advise the consultant on each of these modules at a series of meetings. In addition, considerable experience regarding company law reform in other countries had been taken into consideration. He also briefed members on the recommended legislative reforms to the existing company law, as contained in the executive summary of the consultancy report.

5. In response to Members, the Deputy Secretary for Financial Services (Dep S for FS) explained that the comprehensive review of HKCO had been undertaken by Mr Ermanno Pascutto, a Canadian solicitor and former deputy chairman of the Securities and Futures Commission in Hong Kong. Persons with specialised expertise in different fields were invited by the consultant to provide advice on a module by module basis. This was aimed at enhancing communication with the professional and business communities having the greatest interests in HKCO. She remarked that the Administration did not have a view on the recommendations of the consultancy report at that stage as these had not been endorsed by Government. Meanwhile, a public consultation exercise was underway and interested parties were invited to submit written comments. She also advised that the costs for commissioning the review was about $15 million and there would be no major financial implications for Government following the consultation exercise. Staffing resources for the preparation of the new legislation would be provided by the existing establishment. The Chairman suggested that the Consumer Council should be invited to comment on the consultancy report.

(Post-meeting note: The Administration advised that the Consumer Council had indeed been invited to comment.)

6. In response to Mr Martin LEE, Dep S for FS advised that the timetable for preparation of the new companies legislation was not yet finalized. Notwithstanding, existing legislation had been reviewed continually by the Standing Committee on Company Law Reform for for amendments to be introduced as necessary.

7. As to whether the company law of Hong Kong should align with that of the People’s Republic of China (PRC), R of C commented that the path of development of the company law in PRC was not comparable to that in Hong Kong. The primary purpose of company law in the PRC was to assist with the corporatization of state-owned enterprises to facilitate the transition to a market economy. By comparison, Hong Kong had had a highly developed market economy for a considerable period of time and, as such, the territory’s company law was linked to completely different economic conditions. Furthermore, the PRC’s company law was based primarily on European civil law whereas Hong Kong’s company law was based on the common law.

8. In response to Mr CHIM Pui-chung’s enquiries on the scope of the review, Dep S for FS explained that as the consultancy report recommended an unbundling of non-core company law matters from the Ordinance, regulation of listed companies was not covered in the report and would be considered in the context of other proposed securities legislation.

9. As to whether the recommendation on one person corporations would have adverse effects on existing legislation, Dep S for FS responded that the recommendation to adopt the North American model of incorporation would waive the need to have two parties to create a company by memorandum of association. The regulation of one person companies would still fall under the jurisdiction of common law.

10. Having noted the Administration’s elaboration on the recommendation on "import" and "export" of companies into and out of Hong Kong, the Chairman opined that to allow enterprises from PRC to re-incorporate in Hong Kong without the necessity of liquidation might undermine the protection for shareholders and creditors. R of C noted the view and commented that the above recommendation was expected to generate much public debate.

11. Mr Eric LI said that he supported the spirit of the review but urged the Administration to conduct thorough consultation on the recommendations before making legislative proposals. On behalf of the accounting profession, he expressed the following views with respect to the recommendations relating to accounts and audits:

  1. the establishment of an independent standard setting body to provide external reference for examining recommendations of HKSA on formulation of accounting standards was unjustified. HKSA was already an independent professional body which should possess the authority to assess and approve relevant policies;

  2. the Tenth Schedule of the Companies Ordinance (Accounts) which requested all companies to comply with the formal requirements of accounting practice should not be eliminated;

  3. the recommendation to let private companies have the option of eliminating "mandatory annual audit" was unjustified as the imposition of audited accounts was vital in assessing the financial status of companies;

  4. the information in the consultancy report on Hong Kong’s audit fees, which were allegedly more expensive than those of other countries, was misleading; and

  5. the company law of Hong Kong should not be brought in line with those of the United Kingdom, USA, Australia and New Zealand as their political and professional environments were different from those in Hong Kong.

The Administration noted the above views.

IV. Fairness in subscriptions for initial public offerings

[LegCo Paper No. CB(1) 1735/96-97(01)]

12. Mr Lawrence FOK briefed members on the salient points of the paper on fairness in the subscription of shares in initial public offerings (IPOs) provided by the Stock Exchange of Hong Kong (SEHK).

13. On measures to deal with over-subscription in recent IPOs, Mr FOK advised that an interim measure of dividing the total number of shares available for public subscription equally into pool A and pool B had been introduced. The securities in the two pools should be allocated on a fair basis to applicants who had applied for securities in the value of $5 million or less in pool A, and in the value of more than $5 million and up to the total value of pool B respectively. With the clawback mechanism, some of the shares from the book-building placement tranche could also be transferred to pool A and pool B of the public offer tranche. For instance, if the shares of an equity was oversubscribed by 15 times in the public tranche, the clawback mechanism would be triggered and the public tranche, which was initially set at 10% of the total equity offer, would be increased to 30% of such offer. He added that the mechanism would normally be specified in the prospectus of an IPO.

14. On other mechanisms to ensure fairness in the subscription of shares in IPOs, Mr FOK advised that according to the existing practice, the issuer had to consult SEHK on the offering plan before each issue. SEHK did not usually stipulate a minimum dollar value or percentage of a new issue that had to be allocated for public subscription. However, it would reserve the right to question the justifications for the determined size of the public offer tranche.

15. In response to Mr SIN Chung-kai, Mr FOK advised that persons who were allocated shares by an issuer were allowed to re-sell the shares after the second day of the IPO. He added that this would enhance market efficiency and reduce risk to investors.

16. On fairness of allocation of shares in the placement tranche, Ms Barbara SHIU advised that a placement was made through a book-building process. Sponsors and issuers would solicit indications of interest from prospective institutional and professional investors. Within this class, there were no pre-determined criteria for selection of investors. Decisions on allocation of shares to prospective investors would be made by the sponsors independently. After a placement, sponsors were required to provide SEHK and the Securities and Futures Commission (SFC) with their books containing a list of the investors (placees), together with their demand and the corresponding number of shares allocated. SEHK and SFC would then review the book to ascertain if there had been any irregularities. At the Chairman's request, SEHK undertook to provide a paper on guidelines on allocation of shares for the placement tranche.

17. As regards the allegation of unfair allocation of shares among investors and intermediaries in the placement tranche of recent IPOs, Ms SHUI responded that this was a commercial activity under which underwriters and sponsors had supposedly conducted equity offerings in the best interests of the issuer and its investors. Mr FOK advised that strategic investors had been allocated shares in the recent IPO of the Beijing Enterprise on condition that re-sale of the shares was not allowed within a year of the date of offering. Ms SHIU supplemented that the investors were also not allowed to initiate sale of such shares by means of derivatives trading. At the Chairman's request, SEHK undertook to provide statistics on IPOs of selected shares.

(Post-meeting note: The requisite information was circulated vide LegCo Paper No. CB(1) 1863/96-97 dated 16 June 1997.)

V. Conflict of interest of council members of Stock Exchange of Hong Kong

18. Mr Alec TSUI briefed members on the guidelines for council members of SEHK, as contained in the information paper.

19. In view of the recent acquittal of bribery charges on Ms CHEN Po-sum, a SEHK council member, members urged SEHK to look into the case and review the guidelines for council members of SEHK to avoid conflicts of interest in future. Members also requested information on investigation of the case. In response, Mr TSUI advised that the SEHK council would discuss the matter on 4 June 1997 to decide on responsive actions to be taken. He undertook to relate members�request to the Council.

20. Mr Andrew CHENG Kar-foo and Mr SIN Chung-kai considered it desirable to change SEHK into a public body in the interest of the investing public. SEHK should also be included under the jurisdiction of the Independent Commission Against Corruption (ICAC) so that the behaviours of its council members would be under the regulatory control of ICAC. In response, Dep S for FS advised that the Administration was in support of the proposal in principle and that SFC and ICAC had been working on the issue. Mr TSUI supplemented that SEHK had also been liaising with ICAC and awaiting its reply concerning details of how the change could be made without affecting intermediaries in the market. Upon members�request, SFC undertook to provide a timetable for making the necessary legislative amendments in this respect.

21. Mr Eric LI reckoned that turning SEHK into a public body might have adverse effects on other similar bodies. He opined that SEHK and SFC should review the guidelines for council members of SEHK before making proposals for legislative amendments. Mr TSUI remarked that the outcome of the investigation on the case would facilitate the review on the guidelines.

22. Mr CHIM Pui-chung commented that SFC should employ sanction against the council member concerned in accordance with the fit and proper criteria. In response, Mr David White advised that follow-up actions would be taken by SEHK which was responsible for the front line regulation of the market. In-depth inquiries into the case would follow and disciplinary actions would be taken by SEHK if necessary. Mr TSUI supplemented that penalties such as issuance of a reprimand or expulsion from the council might be imposed upon completion of the investigation.

23. The Chairman was of the view that the monopoly of SEHK had given rise to conflicts of interest with its members. He enquired whether the monopoly status of SEHK would be reviewed by SFC. In response, Mr White advised that the above issue had been included in the consultation paper on a draft composite Securities and Futures Bill. However, SFC believed that the monopoly of SEHK should be retained.

24. The Chairman urged SEHK to consider the following views in the review on the guidelines for council member of SEHK:

  1. council members should not accept any benefits or other advantages for nominating persons as members of SEHK; and

  2. council members should not give misleading information to other council members and lobby them to vote for or against a decision in council meetings.

25. The meeting ended at 10:30 am.


Provisional Legislative Council Secretariat
23 July 1997

Last Updated on 18 August 1998